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Behind South Korea’s Cryptocurrency Boom

The country is a hub for trading virtual currencies despite a government clampdown and North Korean cyberattacks.

It’s well known that South Korea is one of the world’s most wired societies, with near-ubiquitous broadband access and blazing-fast Internet speeds. Now the country is also becoming a hotbed for cryptocurrency trading. South Korea is the world’s No. 3 market in Bitcoin trading, after Japan and the U.S., and the largest exchange market for Ether, Ethereum’s cryptocurrency, accounting for more than 33 percent of its market share. The country is also home to two of the top 15 global digital-currency exchanges (Bithumb and Coinone), both of which have built walk-in centers where investors can conduct transactions in person. Overall, South Korea is believed to have about one million registered daily traders in virtual currency, which is equivalent to about one out of every 50 citizens.

But while the booming digital-currency market is delighting local entrepreneurs, it’s worrying the South Korean government. Authorities are particularly concerned about a new method of fund-raising called an initial coin offering, in which companies create blockchain-based digital tokens, which can be used to purchase a specific product or service in the future, and sell them publicly (See “What the Hell Is an Initial Coin Offering?”). In September, the country’s Financial Services Commission (FSC) ordered a ban on ICOs. “Cryptocurrencies are neither money nor currency nor financial products,” said the agency in a written statement at the time. “The South Korean government has reaffirmed an earlier stance that the state doesn’t guarantee the proper value of virtual currencies.”

The move could hinder local startups that deal in digital currencies and work with blockchain technologies. In South Korea, as in other countries, such startups have been using ICOs to raise funds because the campaigns require little paperwork, let entrepreneurs solicit money directly from investors rather than rely on banks or venture-capital firms, and enable founders to maintain total ownership of their companies. In September alone, South Korean startups raised about $89 million in digital token sales, according to government data. When the FSC announced its ban in late September, 20 South Korean startups said they had planned to raise seed money through ICOs but would fund-raise in foreign countries instead.

South Korea’s restriction came several weeks after China issued its own ban on ICOs, characterizing them as an unauthorized form of fund-raising and “disruptive to economic and financial stability,” and ordered companies to issue refunds to investors. Chinese regulators also instructed digital-currency exchanges to shut down their mainland trading platforms, compelling them to relocate overseas.

Many people have likened the two countries’ decisions, but South Korea’s stance on cryptocurrencies is unique. Unlike China, South Korea has yet to implement its ICO rule and did not make companies return ICO funds. It also continues to let Korea-based investors put money into foreign ICOs and digital-currency exchanges to operate within its borders. In November, Choe Heung-sik, who heads South Korea’s Financial Supervisory Service, said that the agency is monitoring cryptocurrency trading inside the country but has no immediate plan to “directly supervise” exchanges.

The ICO boom looks a lot like a bubble, but at its heart is a genuine innovation.

However, South Korea has signaled it may start levying taxes on cryptocurrency transactions. Currently, trading virtual currencies in the country incurs only commission fees. But on October 13, the chief of the country’s National Tax Agency, Han Seung-hee, told lawmakers that the group is mulling imposing a value-added tax, a capital gains tax, or both on trades, with the help of financial authorities.

An official decision is expected within the first quarter of 2018. If the plan gets implemented, South Korea will become one of the few countries to tax cryptocurrency-cash exchanges. Germany and Singapore levy taxes on virtual-currency trading depending on factors such as the amount of gain and the length of the holding period, but other countries—among them Australia and Japan—recently eliminated their fees.

Retail investors aren’t the only South Koreans excited about cryptocurrencies; some of the country’s biggest corporations are pouring money into virtual-currency businesses and related technologies. Nexon, one of South Korea’s biggest video-game developers, is the leading shareholder in Korbit, the country’s No. 3 cryptocurrency exchange. Dunamu, an affiliate of Kakao, a leading South Korean Internet services company, recently launched a cryptocurrency exchange called Upbit. And the DB Group, another South Korean conglomerate, partnered with the local firm Sentbe in August to offer remittance payments in Bitcoin.

How should governments regulate cryptocurrency trading?

Even Samsung, South Korea’s largest conglomerate, is getting involved in the blockchain technology that makes cryptocurrency possible. In May, the company’s IT solutions unit, Samsung SDS, announced a pilot project that will use this system of widely distributed, frequently updated cryptographic ledgers to track shipping imports, exports, and the location of cargo shipments in real time. That month, the Samsung affiliate also joined the Enterprise Ethereum Alliance, an industry group that is developing business-grade software based on blockchain. “Samsung SDS doesn’t have plans to start up a digital coin business, but the company does intend to develop [new] business models using blockchain technologies,” said spokesman Jo Joo-hong to MIT Technology Review.

South Korea’s fervor for cryptocurrency is notable given that the country has an urgent reason to be skeptical: cyberattacks from North Korea. Hackers probably hailing from North Korea targeted officials at four South Korean Bitcoin exchanges in July and August, according to South Korea’s National Police Agency. The “spear-phishing” plots involved sending messages from stolen e-mail addresses and attaching malicious code that was identical to viruses previously proved to be of North Korean origin. Experts such as the American cybersecurity firm FireEye have theorized that the hackers were responding to increased economic sanctions on North Korea and were interested in Bitcoin because of its relative anonymity, since people can buy and use the currency without revealing their true identities.

“The rampant use of digital currency offers both opportunities and risks,” says Kim Kyung-soo, head of the Ethereum research center in South Korea. “Risk takers are attempting to make profits by delving into these high-volatility assets. But digital currencies could also be used as seed money to lift the next wave of technology developments.”

Hear more about Bitcoin from the experts at the Business of Blockchain on April 23, 2018 in Cambridge.

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